Irish Competition Authority Decisions

1. Notification was made by Calor Teoranta on 29 September 1992 with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to grant a certificate, a licence under Section 4(2) in respect of a standard supply agreement Calor has with bulk customers. Following the issue of a statement of objections, Calor offered to amend the agreement in a manner which satisfied the concerns of the Authority. Calor also withdrew the notification of an older standard agreement which was the subject of the same statement of objections. Notice of intention to grant a licence was published in The Irish Times on 12 May 1995. There were two submissions from interested parties.

2. The notification concerns a standard agreement by Calor with its bulk LPG customers, which provides for exclusive purchase by the customers of all of their LPG requirements from Calor for a minimum period of five years.

3. Calor is the leading supplier of LPG in the State. Calor is a wholly-owned subsidiary of Calor Group plc, which is a listed company on the London Stock Exchange. Calor acquired Kosangas in 1971. It operates in the State, in Northern Ireland and in Great Britain.

4. The principal activity of Calor is the supply and distribution of LPG under the Calor, Kosangas and Calor-Kosangas brand names. A high proportion of LPG must be imported and Calor has four import terminals - at Dublin, Cork, Whitegate and New Ross. It also has distribution terminals at Claremorris and Sligo. Calor stated that the notified agreements had been entered into with contract customers before 30 September 1991, there being several thousand of these outside the domestic sector. Gas was not being distributed to a number of these customers. Supply is made to these customers either by bulk delivery to a tank on their premises, or in cylinders to the premises, or indirectly in cylinders through independent retail outlets identified as authorised dealers. Bulk LPG customers include those involved in industrial processing and heating, commercial heating, water heating and catering, agricultural/horticultural heating, fish farming and road marking, and private households. These customers purchase LPG for their own use. In addition, bulk LPG is supplied to retail petrol stations who in turn supply the motorist. Calor also supplies bottled LPG to retailers who resell it to domestic consumers. The relevant agreement for LPG dealers has been covered by a category licence. [1]

5. The characteristics of the product and the market were described at length in the Authority's category licence for agreements with cylinder LPG dealers. Since LPG is distributed throughout the State, the appropriate geographic market is the State.

6. Under the notified Calor bulk LPG agreement, Calor agrees to supply, and the buyer agrees to purchase from Calor for consumption at the buyer's premises, the buyer's total requirement of LPG for a minimum period of five years. Calor provides equipment for the use and storage of LPG, for which the buyer pays an annual rental. The agreement contains provisions relating to delivery, price, termination, indemnity, insurance and force majeure, among others. There is also provision for the supply of LPG in cylinders rather than bulk delivery.

7. The notified standard agreement comes in three versions, being introduced between 1987 and 1990. They differ from each other only in minor respects. The relevant clauses of these are as follows:

3. The Sellers hereby agree to provide to the Buyers at the service charge set out in Schedule 1 hereof the Tanks listed therein. All tanks shall remain the property of the Sellers at all times.

5. (a) The Buyers shall take from the Sellers all their requirements of Gas at the premises shown in Schedule 1.

(d) Notwithstanding anything herein contained, if the sellers are of the opinion that the consumption of gas by the Buyers does not justify delivery into a Tank, the Sellers may deliver Gas in cylinders and in that event the Sellers agree and undertake to supply the Buyers with a stock of cylinders in accordance with the Buyers requirements on service charges determined by the Sellers......

7. The Buyers agree and undertake:-

(a) not to allow any other company or person to fill gas into the Sellers tanks.

(e) to use the Gas delivered by the Sellers for their own consumption only and that it will not be resold, exchanged, adulterated, decanted or used as fuel in mechanically propelled vehicles constructed or adapted for use on roads without in any case the specific written authority of the Sellers.

(j) not to make any additions or alterations to the gas system without the prior approval of the Sellers.

11. This Contract shall remain in force for a period of five years from the date hereof and will continue thereafter from year to year unless and until determined by at least three months notice in writing given by either party to the other to expire at the end of the five year period or at any anniversary thereof.

8. Calor claimed that, in order to supply contract customers throughout the State with a continuous supply of LPG, it made a substantial investment in purchasing and maintaining tanks and cylinders to the highest safety standards. At present, Calor had approximately 15,000 tanks and 2 million cylinders in issue to service the requirements of contract customers who had entered into standard supply agreements. In addition to its investment in tanks and cylinders, Calor operated a national distribution system to ensure a continuous supply to LPG consumers throughout the State. Calor stated that it supplied LPG to contract customers either by delivery to a tank on their premises or indirectly in cylinders through independent retail outlets identified as authorised dealers.

9. Calor said that the agreement contained one provision which might be deemed to restrict the parties in their freedom to take independent commercial decisions, namely the exclusive purchase requirement in Clause 5(a). It maintained that:

'The object of the restriction on the Contract Customer's ability to purchase LPG only from Calor is to safeguard Calor's interest in the economic benefits of its investment in developing the LPG market which will have a resultant benefit to the Consumer. EEC Regulation 1984/83 would not have any application with respect to an Agreement in the terms of the Supply Agreement as the Supply Agreement does not provide for resale. The Supply Agreement is therefore not subject to a maximum period of 5 years'.

10. Calor put forward the following arguments in support of its request for a certificate:

'(a) Calor's share of the LPG market represents such a minimal percentage of the total energy consumption market that the exclusive purchase provision of the Supply Agreement cannot of itself prevent, distort, or restrict competition in the energy consumption market in the State, or any part of it. Calor's share of the LPG market represented less than approximately one half of one percent of the total energy consumption market in the State in 1991.

(b) There are more than sufficient numbers of potential LPG customers within the State that are not already linked to suppliers of LPG, thus the exclusive purchase provision of the Supply Agreement does not have the effect of foreclosing entry by a new supplier into the LPG market. The primary reasons attributable to Calor's decline in the market has been the relative ease with which competitors have entered the market and which have gained a substantial share of the market in a relatively short period of time. A good example of the ease of entry into the LPG market is the recent entry of Blugas into the market. Over a period of approximately two years, we understand that Blugas already captured approximately 4% of the LPG market.

(c) The primary objects of the exclusive purchase provision of the Supply Agreement is to protect Calor's interest in the economic benefits of the investment that it has made in establishing and maintaining a national storage and distribution infrastructure including the provision and maintenance of Customer Storage tanks and cylinders; its ongoing investment in national marketing of the Calor and Calor Kosangas brands as a safe and reliable product; its support for the promotion and sale of LPG burning appliances necessary to maintain the LPG market and to provide Contract Customers with an assured supply of safe LPG over the period of the Agreement. The exclusive purchase provision of the Supply Agreement allows effective planning of sales and consequently a cost-effective organisation of LPG distribution throughout the State.

We believe that the Agreement, the subject matter of this notification, could not be said to prevent, restrict or distort competition as it does not result in a reduction in the number of market competitors nor does it reduce the threat of potential competition within the relevant market'.

11. In support of its request for a licence, Calor made the following arguments:

'(a) The LPG market can only be maintained and developed by a combination of the continuous promotion and marketing of LPG as a desirable energy source, and LPG burning appliances, and the provision of a national infrastructure of import terminals, cylinders, and customer tanks, cylinder filling and bulk breaking facilities, distribution and after-sales service systems.

(b) In the general gas market LPG cannot compete with the State owned Natural Gas monopoly. Undertakings which require high gas energy input are motivated to locate on the Natural Gas grid. Because of the development of the gas market by Calor the entry of Bord Gais with natural gas was facilitated. Calor has lost approximately 50% (20,000 tonnes) of its bulk gas load to Bord Gais in recent years. Consequently LPG must be marketed in areas not serviced by the Natural Gas grid. Undertakings which require gas in these areas are generally small businesses. Consequently their requirements for gas is limited. Their location relative to import terminals also results in high distribution costs.

(c) The burden of marketing LPG and LPG-burning appliances on a national basis to develop the Irish LPG market has been and continues to be largely borne by Calor. Other suppliers have entered the market seeking to sell gas to existing customers with gas-burning appliances.

(d) Calor has made a major investment in a national storage and distribution infrastructure that ensures a continuous supply of safe LPG to Customers throughout the entire State, including investment in:

- import terminal storage facilities in the ports....., having an aggregate storage capacity of 8,400 tonnes;

- bulk-breaking and distribution depots at six locations throughout the State;

- 2 million cylinders in circulation in the Calor customer network;

- rolling stock, consisting of 40 road tankers;

- 15,000 customer pressure vessels (Tanks) (costing approximately £750 each per 1.5 ton (200 gal.) vessel and approximately £1,000 per ton for larger vessels). These pressure vessels unlike the containers used for oil, are subject to stringent regulations.

- The average throughput of LPG per Contract Consumer is approximately 13 tonnes per annum.

- This relatively low throughput generates a low profit return thus resulting in the necessity of having an exclusive purchasing arrangement for at least 5 years in order to justify the initial investment in the pressure vessel, its transport and installation, maintenance and uplifting at the termination of the agreement.

- It should also be noted that LPG is competing with Electricity and Natural Gas which operate under monopoly conditions and which are, by their nature, long-term market competitors with long-term contracts;

- operation of the storage and distribution infrastructure in accordance with extensive regulations under (a) the Dangerous Substances Act, 1972 and (b) the European Communities (Major Accident Hazards of Certain Industrial Activities) Regulations, 1986, as amended and (c) Safety Health and Welfare at Work Act, 1989. These statutory obligations impose significant obligations on suppliers of LPG as to the manner in which it is stored and transported at all stages in the distribution chain and installed at the Contract Customers Premises;

- operation of a distribution system that ensures a continuous safe supply of LPG to approximately 3,000 Contract Customers throughout the State. The cost of operating such a distribution system is much greater than for other sources of fuel such as oil, because of the requirement to transport and store LPG in pressurised vessels, resulting in significantly lower net pay loads;

- operation of inspection procedures at each stage in the storage, cylinder filling, bulk breaking distribution and installation chain to the

highest international safety standards to ensure the quality and safety of LPG supplied by Calor;

- operation of a national service and emergency system; and

- establishment by Calor of state-of-the-art testing and research facilities to test LPG appliances and equipment for safe use with LPG supplied by Calor.

(e) Calor has largely funded the development of the Irish Liquefied Petroleum Gas Association which is a technical body and provides the technical expertise in LPG to the Gas Technical Standards Committee, under the aegis of the NSAI, established by the Minister for Energy to produce Irish Standards for the gas industry, including Irish Standards for the use of LPG in vehicles and LPG refuelling facilities at retail outlets.

(f) In order for Calor to safeguard its considerable investment in the promotion of the merits of LPG, LPG appliances, its storage, cylinder filling, bulk breaking, distribution, installation, servicing and emergency systems, Calor must be able to plan its operations and services with some level of certainty.

(g) Calor considers that the minimum economically viable period necessary for the Supply Agreement is 5 years due to (i) the scale of Calor's overall investment; (ii) the relatively low average throughput by Contract Customers which is also subject to the continuous overall decline in consumption of LPG as a result of switching by consumers to alternative sources of fuel in the medium term; (iii) the direct costs of installing, maintaining and subsequently removing pressure vessels.

(h) The minimum five-year term would also allow for more effective organisation of Contract Customers support activities such as the provision of an ongoing technical service and emergency services.

(i) Clean gas is an important fuel and essential for some industries. Because Bord Gais has established its distribution system in the more densely populated and industrially developed areas, the remainder of the country is dependant on LPG. The extensive nature of Calor's distribution system contributes to economic progress in peripheral and economically disadvantaged areas within the State by providing a continuous safe supply of LPG to Contract Customers in peripheral and disadvantaged areas. Contract Customers in these areas generally have a low throughput by reason of the scale of their operation.

(j) The five year period for the Supply Agreement considered at (g) above does not infringe E.C. Regulation 1984/83 as the Agreement does not provide for resale.

(k) Consumers of LPG benefit from Calor's investment in a national storage, distribution and service infrastructure as it ensures the convenient availability of safe LPG and after-sales service to consumers throughout the entire State.

(l) The only exclusive obligation on a Contract Customer imposed by the Supply Agreement is to purchase LPG from Calor for a period of 5 years.

(m) Upon termination of a Supply Agreement, a Contract Customer is free to negotiate a new supply agreement with a supplier of his choice.

(n) The existence of standard Supply Agreements the subject matter of this notification would not result in the foreclosure of competitors entering the market. This argument has already been dealt with above'.

12. Calor also presented the following information:

'The European Commission has developed a policy permitting exclusive purchase restrictions in certain circumstances for instance where the restriction would ensure better regularity of supply or a better service to the consumer.

The Campari Case - OJ 1978 L70/69 (1978) 2 CMLR is authority for the view that the relevant factors to be considered in deciding whether there has been an improvement in distribution is whether as a result of the agreement there will be more effective organisation of sales activities, continuity of supply, easier access to the market and proper provision of after-sales and guarantee services.

The decisions in Metro .v. Commission (No. 1) (1977) ECR1875 and Carbon Gas Technologie OJ 1983 N376/17 (1984) are authority for the view that customers will be deemed to have obtained a direct benefit under an agreement if the agreement results in continuity of supply of the particular product. The Beecham/Parke Davis case - OJ 1979 L70/11 (1979) 2CMLR is also authority for the view that a resulting benefit to a customer will be presumed if supply has been improved or if it results in the introduction of new or improved products.

The Commission has also decided in the past that an exclusivity provision will be acceptable if it is shown that the agreement would never have been entered into in the first place and the benefits of the agreement would never have been achieved without such restriction. It is submitted that the exclusive purchasing provision is necessary to achieve the benefits of the agreement by reasons of the necessary investment by Calor which have already been outlined above in conjunction with the relatively low throughput generated.

There have been a number of decisions which although unrelated to liquefied petroleum gas have accepted the principal that an exemption would be given for the period necessary to ensure that the benefits of the agreement are realised. The following decisions are an example of the decisions which have allowed for periods in excess of five years:

1. Rich Products/Jus/Rol - OJ 1988 L69/21 - ten years.

2. Carlsberg - OJ 1984 L207/26 (1985) 1CMLR - eight years.

3. Carbon Gas Technologie - OJ 1983 L376/17 (1984) 2CMLR - ten years.

4. BP/Kellog - OJ 1985 L369/6 (1986) 2CMLR - seven years.

5. Mitchell Cotts/Sofiltra - OJ 1987 L41/31 - ten years.

6. De Laval/Stork - OJ1977 L215/11 (1977) 2CMLR - twenty years.

It is submitted that the minimum period of five years as stipulated in the Supply Agreement is necessary to ensure the benefits of the Agreement are realised'.

13. In response to queries from the Authority, Calor wrote to explain the situations when gas distributed in cylinders could arise, such as:

(i) access problems in bad weather conditions or road or site works which prevent a road tanker getting close to the customer tank. Some customers liked to have some large cylinders (75lb or 104lb) as standby;

(ii) a defect in the bulk tank installation requiring the tank to be shut down;

(iii) servicing or changing of a tank for refurbishment;

(iv) changes in the customer site which would make the site unsuitable for the bulk tank under safety standards, but which would still enable a number of large cylinders to be installed as an alternative. This took the form of cylinders being connected to a common manifold to supply the system; and

(v) significant change in the customer's demand for LPG leading to a situation where the demand could be met more efficiently by an installation of large cylinders.

Large cylinders, in this context, performed the same role as tanks. In some markets they were filled by bulk road tankers in the same manner as bulk tanks. Calor, however, believed that it was safer to fill them in a filling plant, because of the critical safety factor which arose from overfilling of an LPG pressure vessel.

14. Following the publication of the Flogas notifications by the Authority, Blugas transmitted two lengthy submissions to the Authority, at the end of July 1992, prepared by economists and lawyers respectively. These also referred to the Calor bulk agreements, which had not at that time been notified. The main points made in the economic submission were as follows:

(a) the nature of the product involves relatively high sunk costs (that is investment which is not recoverable if a firm leaves the industry) on behalf of suppliers;

(b) the two main suppliers have a market share of about 95%;

(c) there is a lengthy period for the exclusive purchasing contract;

(d) customers must give a certain period of notice, normally three months, before switching to another supplier;

(e) the relevant market is that for LPG, which is distinct and well-defined;

(f) LPG is important for certain industrial processes;

(g) the hypothesis cannot be rejected that there is not collusion between Flogas and Calor Kosangas;

(h) there are switching costs in changing to a new supplier, which represent a barrier to entry to the market;

(i) customers may not refill tanks with the products of other firms;

(j) ownership of tanks by the suppliers may increase a rivals' costs of entering the market;

(k) the LPG market does not appear to be competitive, and uncompetitively high prices could be maintained over a long period.

15. The main claims made in the submission from the lawyers of Blugas were that:

(a) the common law traditionally rendered unenforceable covenants in agreements that represented an unreasonable restraint on trade which were considered to be contrary to public policy;

(b) prima facie, exclusive purchasing agreements offend against Section 4(1);

(c) the Calor agreement does not meet the criteria specified in Section 4(2) because:

(i) the bulk customer is prohibited from taking any other product by means of a

separate tank;

(ii) the agreements are not capable of termination within any reasonable period;

(iii) the clauses are unnecessarily severe and beyond what might be required to protect reasonable interests; and

(d) it is not open to the Authority to grant the licence/certificate sought by Calor as the use of such agreements by the market leader Calor and by Flogas amounts to an abuse of a dominant position by either or both of these entities.

16. The submissions by Blugas have been taken into account by the Authority, insofar as they relate to the notified agreements. It should be pointed out that, subsequent to its submissions, Blugas notified its bulk supply agreements to the Authority with a request and arguments for a certificate or a licence (CA/540/92E). These agreements, which followed industry practice, provide for the exclusive purchase of Blugas by the bulk customer for five years. As stated above, Flogas had already notified its bulk agreements (CA/16/92E), which provide for exclusive purchase of Flogas or Ergas. Licences were granted to these agreements in April 1995. [2]

17. Calor strongly rejected the analysis and conclusions in the Blugas submissions. It argued that the assumptions in relation to the market and to the notified agreements were inaccurate, and that the submissions should have little, if any, implication in respect of the Authority's consideration of the Calor agreements. In summary, Calor made, inter alia , the following observations on the economic submissions:

(a) the economic paper was only theoretical and was based on unprovable assumptions, many of these assumptions being incorrect;

(b) it was incorrect to conclude that a distinct LPG market existed;

(c) the assumptions in relation to the practices in the market were defective because the authors had relied on incorrect information concerning Calor;

(d) it had not been shown that the agreements notified by Calor had created barriers to entry or had given rise to collusive behaviour;

(e) the understanding of the market is flawed because there are a number of inaccuracies in the economic paper, such as the references to the Irish Liquefied Petroleum Gas Association, and the claims that the Calor bulk agreements contained a 12-month period for termination;

(f) there was not a well-defined market for LPG, but the different energy products all formed part of the one relevant market, which should more correctly be segregated by use. None of the products were in a position to prevent effective competition, and none could behave to an appreciable extent independently of its competitors and consumers.

(g) price was a key factor in the energy market. There were a number of deficiencies in the ERSI paper quoted by Blugas [3], and in the conclusions drawn from it. The ESRI paper itself showed a cross-elasticity between gas and LPG, and accepted that a different measuring mechanism might show higher elasticities;

(h) while the economist's paper referred to conditions in which collusion might occur, it did not prove that such conditions existed for LPG, and certainly did not demonstrate that collusion occurred or that unfairly high and anti-competitive prices had been charged. The paper did not admit that a similarity in pricing was more likely to occur as a result of market forces. Competition between Calor and Flogas was intense;

(i) the approach of the authors to barriers to entry did not take cognisance of the approach taken by the European Court in the case of Delimitis v Henniger Brau (1991). The real barrier to entry to the Irish LPG market was the cost of import terminals, not exclusive purchasing agreements;

(j) the authors did not address the argument that the level of any barriers to entry must be balanced against security of supply and the other benefits which had been recognised by the EC Commission;

(k) there was no proof that easy switching would lead to lower prices, but the opposite was the case; and

(l) matters of business, trade or competition were never discussed at meetings of the ILPGA.

In relation to the legal submission, Calor in brief said that:

(1) the Competition Authority had no power to apply the common law doctrine of restraint of trade. This doctrine had not been applied to exclusive purchasing agreements, but mainly to employment contracts and sales of business, and it did not 'of necessity apply' to exclusive purchase agreements. Common law had held that certain exclusive supply or purchase agreements could in fact enhance competition, which concept had been accepted by the EC in certain regulations, including Regulation 1984/83;

(2) the fact that LPG was imported from other member states was irrelevant for the Competition Authority, since the agreements related only to trade within the State. The agreements did not in any way impact on inter-State trade. A decision to grant a certificate or a licence would not prejudice the practical effectiveness of the EC Treaty, but would be in line with Commission decisions;

(3) the agreements met the criteria of Section 4(2) of the Act;

(4) nowhere was it shown that the clauses in the agreements were unnecessarily severe and beyond what was reasonable; and

(5) the legal submission had not considered whether Calor or Flogas had a dominant position nor that any abuse had occurred. It was not open to the Authority to take cognisance of such an issue in the context of a decision whether to grant a licence/certificate to the agreements notified.

18. The Authority issued a statement of objections in respect of the notified agreement on 24 November 1994. In a letter of 22 December 1994, Calor offered to amend the agreement, and the text of the proposed amendment was submitted to the Authority by letter of 19 January 1995. Calor proposed sending a letter to bulk customers which would make the following amendments to the agreement:

(a) Clause 11 is amended to read 'This contract will remain in force for a period of five years', and the rest of the clause is deleted (i.e. automatic extension of the duration of the agreement beyond five years and the notice period for termination); and

(b) Clause 7(j) is amended to read 'In the interest of maintaining the safety of the Gas System not to make any additions or alterations to the gas system without prior approval of the Seller'.

Calor confirmed by a letter dated 13 March 1995 that it had issued this letter to bulk customers.

19. Following publication of the Authority's intention to grant a licence to the notified agreement, two submissions were received from interested parties. Their comments have been taken into account in the following assessment.

20. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State.

21. According to Section 3(1) of the Act, 'undertaking means a person being a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service'. Calor is an incorporated body engaged for gain in the supply and distribution of LPG, both to resellers and to final consumers. Accordingly, Calor is an undertaking within the meaning of the Act. Bulk customers are not resellers of the product but consume it themselves. A number of the bulk customers are engaged in the production, supply or distribution of other goods, or the provision of services, for gain, being engaged in farming, manufacturing, retail trade, catering, motor service stations, and so on. These customers are also undertakings within the meaning of the Act. A number of bulk customers may not come within the definition of an undertaking and supply agreements with them are not therefore covered by the Act. This decision does not apply to such agreements. With the exception of these agreements, the notified agreements are agreements between undertakings within the meaning of Section 4(1) of the Act.

22. The Calor bulk LPG agreements provide that the customer shall purchase from Calor his total requirements of LPG. The agreements apply to exclusive purchase of cylinders as well as to bulk supplies of LPG. All agreements have an initial term of five years, and as notified were automatically renewed each year thereafter. Three months' notice of termination of the agreement had to be given, to expire at the end of the fifth year, or at each anniversary thereafter. Exclusive use of Calor LPG in the equipment supplied by Calor is ensured in the agreements since no other company or person, besides Calor, is to be allowed fill gas into Calor's tanks. The agreements oblige the buyer not to make any additions or alterations to the gas system without the prior approval of Calor. Finally, although it is not stated in the agreements, each buyer who has signed an agreement must purchase LPG exclusively from Calor even if he purchases cylinders from a Calor dealer.

23. For the duration of the agreement, the customer can only purchase LPG from Calor, and from no other supplier, and no other supplier can sell the product to the customer. This limits the commercial freedom of the customer to buy LPG from any source he wishes, and the ability of others to supply him, and denies him supplies unless he accepts the exclusive purchase requirement. While each individual agreement might have relatively little effect upon competition, all the agreements together form a network of restrictive agreements for the distribution of Calor to bulk customers. As Calor has a substantial share of the market, the combined effects of these agreements is considerable. This is reinforced since Flogas and Blugas also have similar exclusive purchase agreements, thus forming a restrictive system of distribution in the LPG market as a whole. No customer can purchase LPG from anyone other than the exclusive supplier for a relatively long period of time. This tends to introduce a considerable degree of rigidity into the market, and it makes it difficult for a new entrant to enter the market quickly on any significant scale since a large number of potential customers, including many large users, are not available, at least until their exclusive agreements have expired. The Authority considers, therefore, that the standard Calor bulk supply agreements have the object and the effect of preventing, restricting or distorting competition in goods in the State, and thus they offend against Section 4(1).

24. The Authority's view about long-term exclusive purchasing agreements is compounded by the fact that, after the initial period of five years, the agreement, as notified, was on a year-to-year basis. The Authority regards such an agreement as being of indefinite duration, since it is automatically renewed unless notice of termination is given, rather than being simply of one year's duration. Such agreements also offend against Section 4(1). The Authority also considered that fairly lengthy periods of notice - three months in the notified agreements - might tend to dissuade customers from terminating their agreement and thus restrict competition and so they offended against Section 4(1). Calor has now amended the agreement by limiting the duration to five years and by deleting the requirement to give notice of termination.

25. The agreements provide that no other person or company is permitted to fill gas into the tanks. The tanks must therefore be used solely for the storage of LPG supplied by Calor. The equipment usually consists, at least, of a pressurised bulk storage tank, and Calor is entitled to remove it on termination of the agreement. The views of the Authority in respect of exclusive use of equipment requirements which represent exclusive purchasing obligations have been given in its decision on certain Burmah Castrol agreements [4].

26. In the present case, the requirement that no one besides Calor may fill gas into the tanks, while it means that the tanks cannot be used for the products of competitors, does not in itself have the object or effect that the customer must purchase LPG exclusively from Calor. The customer is already subject to an exclusive purchasing obligation. Its purpose is to prevent competitors from securing a 'free ride' in the costly equipment which has been supplied by Calor, thus giving them a competitive advantage. There would usually be space in the customer's premises for the installation of a competitor's storage tank, or they could purchase cylinder gas from another supplier. While this might be less convenient, it does not, of itself, prevent the customer from buying from suppliers other than Calor, it does not have the effect of representing an exclusive purchasing agreement, and the requirement does not offend against Section 4(1).

27. The agreements as notified obliged the buyer not to make any additions or alterations to the gas system without the prior approval of Calor. The equipment is not the property of Calor, and the customer is made responsible for the maintenance of all equipment other than the tank. If this obligation is for the purpose solely of ensuring that safety standards in the gas system were to be maintained, the Authority would not regard it as offending against Section 4(1). If it were to be used to restrict the freedom of the buyer in making additions or alterations to the system, or restricting his freedom in obtaining equipment except with the permission of Calor, the Authority would regard it as offending against Section 4(1), (and would not satisfy the conditions of Section 4(2) of the Act). Calor has amended the agreement to emphasise that the clause is in the interest of maintaining the safety of the gas system, and the Authority considers that it does not now offend against Section 4(1).

28. The Authority considers that the other clauses in the notified agreements do not offend against Section 4(1) of the Act. In particular there is an obligation on the buyer to use the gas for his own consumption and not to resell, exchange, adulterate, or decant it or use it for fuel in motor vehicles without the permission of Calor. The agreement is specifically with the final user, not for resale, and these obligations are essentially for safety reasons.

29. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which, 'having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

30. In the opinion of the Authority, the bulk LPG agreements notified by Calor, as amended, fulfil the conditions provided for in Section 4(2).

31. The Authority is aware that LPG is volatile and can be dangerous, and that safety considerations are of great importance, often being laid down by statute. In addition, the supplier provides pressurised equipment, particularly storage tanks, for bulk customers. These features are not sufficient, however, to persuade the Authority that any exceptional treatment can be justified for the supply of bulk LPG to customers.

32. The Calor bulk LPG agreements, in principle, produce an appreciable improvement in distribution. They enable the supplier, who distributes bulk LPG direct usually to a specialised pressure storage tank on the premises of the customer, to plan the sales of his goods with greater precision and for a longer period, and to justify the investment in costly storage and distribution equipment. They ensure that the customer's requirements will be met on a regular basis for the duration of the agreement. They permit a reduction in distribution costs, compared to a situation where the customer purchased less frequently from two or more suppliers of LPG, for each of which he would need a separate storage tank. These benefits apply to over half of LPG purchased in the State, the remainder being accounted for by retail sales of cylinder LPG. The agreements also contribute to technical progress by virtue of adherence to safety standards and the provision of technical advice.

33. In the Authority's view, the term consumers refers to the users of a product, who, in the present case, are bulk customers. Such customers gain a fair share of the benefits from the exclusive purchasing requirement by being assured of regular supplies of LPG. This is especially important to buyers who wish to use gas but who are not adjacent to the natural gas grid. Being generally fairly large purchasers, certainly larger than domestic consumers, they are able to use their buying power to secure some of the benefits of reduced distribution costs in their purchase prices for LPG. They also benefit from the fact that they do not need to invest in the essential pressurised storage equipment, which is not needed for other fuels, but they are charged a rental which does not represent the full cost of buying and maintaining the equipment, though this cost is probably recovered over time in the price of the LPG. Customers also benefit from the continuing attention to safety, by way of technical advice and safety support services.

34. There are special circumstances in the supply and distribution of LPG, where expensive storage equipment is required and is supplied by Calor, and where safety factors are important. Since the Calor equipment may be restricted to LPG from Calor only, the benefits of the savings in distribution costs would not be obtained if the exclusive purchasing obligation was not imposed, and if one or more other LPG suppliers could also instal tanks and supply their brand of LPG. The exclusive purchasing obligation, in this situation, is considered to be indispensable in securing the benefits outlined above. (The Authority does not believe that exclusive purchasing obligations generally upon end-users or final customers could be justified except in special circumstances). This is so only if the exclusive purchasing obligation is limited to a period of five years, since a longer period would not be justified by the size of the investment made by Calor. The buyers are generally located away from the national gas grid, and tend to be smaller than the major users of gas, which are located close to the natural gas grid. The notified agreement lasted for an initial period of five years, but was automatically renewed from year to year thereafter, subject to a three month period of notice. The Authority considered that these provisions were not indispensable, and that the agreements therefore did not satisfy the conditions of Section 4(2). Calor has deleted these provisions and the agreements have a duration of five years. The Authority considers that a period for exclusive purchase of five years is indispensable to secure the above benefits.

35. Given the structure of the LPG industry, the Authority considered carefully whether the exclusive purchasing system represented a significant barrier to entry which could result in the foreclosure of new entrants. The long-established firms, Calor and Flogas, have a combined market share of over 90%. Between them, they have exclusive purchase agreements with almost [ ] bulk customers, excluding domestic consumers. Not surprisingly, these customers include those which regard gas as an essential fuel, but which do not have access to natural gas, though they are few in number. Establishment of a presence in the market as a supplier of LPG is an expensive operation. Nevertheless, in spite of the fact that the LPG market has been dominated by only one or two firms since its establishment nearly 60 years ago, the Authority considers that the following facts are also relevant:

(a) while several thousand customers in total are bound to purchase exclusively from one supplier for up to five years, there are a large number of other potential customers available to a new entrant for the supply of LPG;

(b) it might be expected that, on average, up to 20% of the tied agreements expire every year, and these customers are free to sign a new agreement with the existing supplier or with another supplier;

(c) the industry has been marked by the occasional successful entry of new suppliers, such as Ergas in 1971, Flogas in 1978, Tervas in 1987 and Blugas in 1990. Although Ergas ceased to exist as a supplier independent of Flogas in 1989, Blugas does appear to have built up a network of bulk customers and to have achieved a not insignificant market share in a relatively short period.

The Authority concludes, therefore, that, while the existence of networks of tied customers with exclusive purchasing agreements might make it more difficult to enter the LPG market than in the absence of such arrangements, access to the market is not entirely ruled out, and the exclusive purchasing systems do not operate to foreclose new entry. At the same time, the establishment of a large exclusive customer network by Blugas, in addition to those of Flogas and Calor, would make it more difficult for another supplier to enter the market than it has been for Blugas to enter.

36. As already noted, customers should be powerful enough to ensure that they were not paying excessive prices for Calor LPG compared to that from a competitor. In addition, it is always possible for many customers to use another fuel in alternative equipment with relatively little delay, and to cease purchasing LPG entirely. There is thus no possibility of eliminating competition in respect of a substantial part of the products in question as a result of the exclusive purchasing conditions in the notified agreement.

37. While the above consideration of the requirements of Section 4(2) has related primarily to the supply of LPG to bulk storage tanks, the Authority considers that it is equally applicable in the case of supply in cylinder form, even where the cylinders are obtained from distributors or dealers and not directly from Calor. Furthermore, a customer which obtains cylinder LPG has the option of obtaining the cylinders from dealers directly, rather than under the industrial LPG agreement.

38. The Authority has decided to grant a licence in this case to agreements which involve the exclusive purchase of bulk LPG for a period of up to five years, whereas in the LPG dealer category licence it only permitted exclusive purchasing agreements provided that these did not exceed two years in duration [5]. This is because the Authority considers that the market conditions differ between the two situations. In particular, the dealer agreements resulted in the tying of a large proportion of all available retail outlets, which is not the case with the bulk LPG agreements. For the avoidance of doubt the Authority believes that it is important to state that five years represents the maximum period for which an exclusive purchasing obligation for bulk LPG may apply. Any attempt to extend this period by a supplier concluding agreements with parties for an additional period more than 30 days before its existing agreement with a customer has expired or is terminated would be contrary to the provisions of this licence.

39. In its assessment, the Authority has had regard to the approach adopted by the EU Commission to exclusive purchasing agreements, particularly those where the product is to be used in the production of another product, rather than for resale. In its Seventh Report on Competition Policy [6], the Commission stated:

(a) 'Exclusive purchasing agreements may endanger competition, because they limit the purchaser's freedom of choice and therefore at least potentially restrict the sales outlets open to other suppliers.' (p. 21).

(b) 'The applicability of Article 85(1) to exclusive purchasing and other such arrangements depends on whether or not the arrangement, either alone or in conjunction with other similar arrangements between the same or different firms, may appreciably affect entry to the market and sales by third parties.' (p. 23).

(c) 'The Commission considers that exclusive purchasing agreements can contribute to improving the production and distribution of goods, because they make it possible for the parties to the agreement to plan their production and sales more precisely and over a longer period, to limit the risk of market fluctuation and to lower the cost of production, storage and marketing.' (p. 23).

(d) 'However, exemption can only be given where the firms involved do not retain the whole of the benefit. Consumers must be allowed their fair share as well. The benefits must also be great enough to balance out the restrictions of competition they bring with them. These tests are not satisfied if the exclusive arrangements make it more difficult for other firms to sell on the market, and especially if they raise barriers to market entry.' (p. 24).

40. The Authority agrees with the view of the EU authorities that exclusive purchasing agreements may produce benefits, including continuity of supply, and that the duration of such agreements should reflect the period needed to ensure that the benefits are realised (see para 12). The references cited by Calor in their submission, however, are considered to be irrelevant to exclusive purchase agreements for the supply of a fuel such as LPG. Campari involves trademarks and secret manufacturing processes; Metro is concerned with exclusive distribution and resale of goods; Carbon Gas Technologie cases involve cooperation, know-how and research and development; Rich Products/Jus-rol involves know-how licensing; Carlsberg concerns goods for resale; BP/Kellogg deals with the development of a manufacturing plant and the supply of a catalyst; Mitchell Cotts/Sofiltra refers to a joint venture and exclusive sale; and DeLaval/Stork is also a joint venture.

41. Calor and their industrial customers are undertakings within the meaning of the Competition Act. The industrial bulk LPG agreement is an agreement between undertakings. Because of the exclusive purchasing requirement in the notified agreement, it offends against Section 4(1) of the Act. The Authority considered that the notified agreement did not satisfy all the conditions of Section 4(2), because it had a duration of more than five years and it required notice of termination, and because additions or alterations to the gas system required the prior approval of Calor. The Authority is of the opinion, however, that the agreement, as amended by the letter of 19 January 1995 from Calor, satisfies all the conditions of Section 4(2) of the Competition Act.

42. The Authority therefore grants a licence under Section 4(2) in respect of the notified standard Calor bulk LPG agreement, as amended.

43. The licence shall apply from the date of this decision, that is 22 June 1995. It appears appropriate that the period specified for the licence should be ten years, that is until 21 June 2005.

44. Under Section 8(1) of the Competition Act, the Authority may grant a licence subject to such conditions as may be attached to and specified in the licence. Given the very large market share possessed by Flogas and Calor, the Authority considers that it is necessary to monitor developments in the market for bulk LPG in order to ensure that the conditions of Section 4(2) continue to be satisfied. Accordingly, the licence is issued subject to the following reporting conditions:

that Calor submit to the Authority the following information for each calendar year:

(a) the total number of industrial LPG agreements (that is non-domestic bulk supply agreements) in operation at the end of the preceding year; and

(b) the total volume of sales, in tonnes, of industrial LPG to those customers in the preceding year.

The first of these reports shall be submitted within 60 days of the date of this licence, and subsequent reports must be submitted before the end of May following each year.

45. The Competition Authority grants the following licence to the agreement notified by Calor Teoranta, as amended:

The Competition Authority grants a licence to the standard Calor Teoranta bulk LPG agreement notified to the Competition Authority on 29 September 1992 (CA/155/92E), as amended by the letter of 19 January 1995 from Calor Teoranta, insofar as the buyers are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, on the grounds that, in the opinion of the Authority, all the conditions of Section 4(2) of the Competition Act have been fulfilled. This licence shall apply from 22 June 1995 to 21 June 2005.

Calor Teoranta shall, within 60 days of the grant of this licence and thereafter every year before the end of May, send a report to the Authority covering the preceding year.

The reports shall contain the following information:

(a) the total number of industrial LPG agreements (that is non-domestic bulk supply agreements) in operation at the end of the preceding year; and

(b) the total volume of sales, in tonnes, of industrial LPG to those customers in the preceding year.

2. Decision No 388 of 10 April 1995 - Flogas Ireland Ltd/bulk customers; and Decision No 389 of 10 April 1995 - Bulgas Ltd/bulk customers.

3. Energy Elasticities: Responsiveness of demands for fuels to income and price changes, P Conniffe and S Scott. Economic and Social Research Institute, 1990.

4. Decision No 361 of 13 October 1994

5. Op. cit.

6. EC Commission, Seventh Report on Competition Policy, 1977, Brussels, Luxembourg, April 1978